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Reducing cost and complexity in hedge and AIM fund compliance

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Since the inception of hedge funds some four decades ago, appetite has grown within the market and, according to the 2020 Preqin Global Hedge Fund Report, there are now more than 16,300 active hedge funds with a global AUM of $3.61 trillion. Meanwhile, the London Stock Exchange (LSE) launched its Alternative Investment Market (AIM) in 1995 and by the end of 2019, AIM investment funding stood at £104 billion.

As these markets have evolved, so too have regulatory compliance and reporting requirements. This article focuses on ways of reducing the cost and complexity of hedge and AIM fund compliance.

Hedge funds tend to be utilised mostly by private investors as opposed to institutions. Alternative investment funds are similar in this respect, but with an increased ratio of institutional investor participation. It is widely acknowledged that, historically, both of these fund types have been substantially less regulated than their mutual equity fund cousins. However, neither is immune to the increasing onslaught of regulatory pressures and a significant number of global regulations do apply, such as AIFMD, FATCA and CRS, EMIR, MiFID and more.

Both fund classes have experienced increased regulatory reporting demands in recent years, representing significant overheads that many smaller funds, because of their size and operating model, are finding extremely difficult to absorb. As a consequence, a growing number of fund managers are considering an outsourcing approach using managed, self-managed and external consultant services. These options are gaining significant traction as fund managers seek to reduce costs and improve operational elegance.

Regulatory reporting represents just one of the many and varied challenges facing most alternative investment fund managers (AIFMs) and hedge fund managers today. It creates a dilution of focus away from the manager’s core business activities, which are of course to maximise return on fund investments and raise capital. To main the necessary laser focus on investor returns, consideration should be given to alleviation of overhead burdens, particularly those relating to operations and compliance.

Global directives necessitate an onerous level of reporting on a monthly, quarterly and/or annual basis. And rarely are deadline extensions permitted – although some exceptions have been made in the current COVID-19 context. Even then, these extension permissions are complex in their interpretation and care must be taken not to inadvertently fall foul of one’s legal regulatory obligations.

Such high-stakes complexity is leading many investment managers to engage with professional practitioners and industry subject matter experts, who can offer advice and services that remove much of the associated burden and headaches. At its most effective, this outsourced service provision will include a combination of tailor-made technology and expert intellectual resource.

A hosted regulatory and compliance infrastructure that offers largely automated reporting based upon proprietary and bespoke software applications should be a first consideration for firms seeking to rationalise their operational work-flows and resource. Qualitative and quantitative gains can be achieved by minimising capital investment and optimising operational costs, also creating a largely predictable spend that improves budgetary controls and visibility.

Beyond the outsourcing of regulatory reporting activity, investment managers seeking to reduce the time to market to launch a new fund while still adhering to FCA and AIFMD rules can opt to become an appointed representative of a principal firm, such as Lawson Conner, that holds its own FCA authorisation. This turn-key solution can be delivered in weeks rather than spending months awaiting formal FCA approval and presents a fast-tracked market entrance that remains aligned with formal delegation measures, risk management and due diligence.

Last but not least, anti-money laundering (AML) services form an additional integral pillar supporting financial services firms and fund managers who remain under constant pressure to keep up with ever-changing AML requirements – such as the EU’s Fifth AML Directive (5AMLD) and the recent change to the Cayman Islands’ AML/CTF legislation that took effect on 5 August 2020. Reduction of this particular burden can be achieved through the introduction of a managed services approach, which would ideally form part of a bigger arsenal, integrated with the services previously outlined.

In summary, there is an array of services and technology available to assist both emerging and start-up AIFMs and hedge fund managers. While it is acknowledged that the current pandemic landscape and consequent market volatility are proving enormously difficult to navigate, there remains options to explore to streamline regulatory and compliance practices and processes that will improve efficiencies and optimise spend – providing great comfort to entrepreneurs and teams as they consider launching the fund of tomorrow.

About Lawson Conner

Part of the IQ-EQ group, Lawson Conner is an award-winning UK provider of outsourced regulatory hosting and compliance solutions.

Lawson Conner’s bespoke compliance software assists with AML regulations, due diligence and onboarding, ensuring compliance with the latest regulatory changes. It also reduces manual processing, cutting down on the risk of human error and slashing processing times by up to 80%.

Meanwhile, our appointed representative services save our clients time and money by offering a quick and efficient route to market with unparalleled access to high-quality compliance expertise.

To find out more and discuss your requirements, please get in touch:

E: [email protected]
T: +44 207 305 5810